By Anika Priyaranjan
Illustration by Keo Morakod Ung
Markets love certainty, and Donald Trump’s re-election gave investors exactly that—a clear direction, familiar policies, and a pro-business agenda. The stock market surged in response, riding a wave of optimism fueled by promises of tax cuts, deregulation, and economic growth. But beneath the surface of this financial exuberance lies a more sobering possibility—what economists warn could be a “doom loop,” a self-reinforcing cycle of economic risks with far-reaching consequences.
Trump’s agenda has undeniably stirred excitement. Tax cuts and deregulation are designed to spur investment, and a stronger U.S. dollar signals global confidence in the economy, drawing foreign investors to U.S. markets. Sectors like infrastructure, energy, and technology are thriving on expectations of reduced regulatory hurdles and increased spending. This optimism is a hallmark of Trump’s growth-focused narrative. However, historical patterns and current economic indicators suggest that such highs often carry hidden vulnerabilities. For instance, the 2017 Tax Cuts and Jobs Act (TCJA) aimed to stimulate growth through significant tax reductions, but the Congressional Research Service reported minimal first-year economic effects, with limited GDP and wage growth. Additionally, the tax cuts contributed to a rising national debt, with the Congressional Budget Office estimating an increase of approximately $1.9 trillion over a decade. Moreover, trade policies and tariffs, particularly those targeting Chinese imports, have heightened trade tensions, raising concerns from the European Central Bank about the risks of retaliatory measures and trade wars. Compounding these issues, the Federal Reserve has highlighted that growing income inequality, partly driven by such policies, could amplify financial sector vulnerabilities, reducing overall consumption and increasing instability. These examples underscore the need for caution, as short-term optimism may mask deeper structural risks.
Economists like Harry Dent warn that this rally may be short-lived. The U.S. economy is grappling with substantial private sector debt, with the private sector debt to GDP ratio being 216.50% in 2023 and historical patterns of economic bubbles suggest that they rarely end smoothly. Dent anticipates a significant market downturn by mid-2025, driven by excessive private sector debt and persistent imbalances. This looming correction could be the tipping point that pushes the economy into a doom loop.
The features of a doom loop are already visible. Tax cuts and tariffs may stimulate short-term domestic investment, but they risk fueling inflation, especially as imported goods become more expensive. To control inflation, the Federal Reserve may have to raise interest rates, making borrowing costlier for businesses and consumers. Higher interest rates, which attracting foreign capital, strengthen the U.S. dollar—a move that complicates trade dynamics by making American exports pricier for foreign buyers and increasing the trade deficit. Simultaneously, cheaper imports could undercut domestic manufacturing, contradicting Trump’s “America First” narrative.
Compounding this is the strain on emerging markets, many of which rely on dollar-denominated debt to fuel growth. A stronger dollar increases their debt servicing costs, heightening the risk of financial crises in these regions. For example, during the US dollar rally in October 2022, the USD/EUR exchange rate peaked near parity, and the USD/GBP rate surged to a record high, reflecting the dollar’s dominance. Such movements strained emerging markets with high dollar-denominated debt, as their borrowing costs skyrocketed. This instability often triggers a contagion effect, reducing global demand and intensifying volatility in international markets. These interconnected dynamics—rising inflation, a stronger dollar, weakened trade balances, and emerging market fragility—form the core of Trump’s potential doom loop. This doom loop effect underscores the delicate balance policymakers must strike in a globalised economy. With the US playing a unique and central role in global trade and finance, the ripple effects of its policies can be felt far beyond its borders.
Yet, this downward spiral is not inevitable. The administration has tools at its disposal to navigate these challenges. Addressing inflation with measured fiscal and monetary policies, fostering global financial stability, and balancing domestic priorities with international cooperation could prevent the loop from tightening. Dent’s warnings serve as a reminder of the intricate interplay of economic policies in a globalised world.
While it’s clear that the market is currently riding high, the real question is how long it can maintain this momentum without unravelling. Trump’s economic policies have reignited optimism, but avoiding a downward spiral will require skillful navigation through a minefield of interconnected risks. The dollar may be soaring, but the true test lies in whether the economy can sustain its altitude or succumb to the gravity of its own contradictions.
The background image belongs to its rightful owner:
Library of Congress of “Portrait of President-Elect Donald Trump”, published on January 20, 2020, Digital Photograph, available via Unsplash Free Photo Licensing at the link https://unsplash.com/photos/president-donald-trump-jPN_oglAjOU
UCL Rethinking Economics 